THE WORLD ECONOMY entered a period of stagflation during the 1970s.
Markedly slower growth combined with rates of unemployment and
inflation that were unprecedentedly high for the postwar era, and the
slowdown persists to this day. In this paper we draw on a larger study
of the deceleration of potential growth to emphasize the contributory
role of demand shortfalls in prolonging and deepening the adjustment to
lower growth rates of productivity and real wages. A key issue is the
relative importance of high real wages and deficient aggregate demand
as proximate causes of the rise of unemployment.